You Can’t Always Get What You Want

The retirement income option is all the buzz … but good luck
finding a recordkeeper to agree to it

Illustration by Don Kilpatrick

As traditional, defined benefit (DB) pension plans become
less prevalent in the workplace, retirement income options in 401(k) plans are
gaining traction because of their ability to help individuals secure a steady
stream of income from their net retirement savings.

According to BlackRock’s 2012 Annual Retirement Survey, 88%
of plan participants would like a steady income stream at retirement, versus
12% who prefer a lump sum. Plan sponsors also recognize this need, with 81%
agreeing that participants prefer a steady income stream. But what happens when
a plan sponsor looks for a retirement income option that a recordkeeper will
not host?

Jason Chepenik, managing partner of Chepenik Financial,
discovered this firsthand when, about a year ago, one of his clients decided to
add a retirement income option to its near-$350-million-in-asset 401(k) plan.
Chepenik describes the midsized technology company’s plan as the “design we all
hope to achieve.” Automatic enrollment is 6% with a match, dollar-for-dollar,
up to 6%. The firm started this 13 years ago—a move that, Chepenik says, was
“extremely progressive at the time.”

Today, the company has more than 90% 401(k) participation,
with the average balance of each plan participant at approximately $175,000.
Despite this success—or perhaps because of it—the plan sponsor recognized the
need for employees to have financial security not only to get to retirement but
also to get through it, Chepenik says.

David Roberts, benefits manager for the California-based
company requesting the retirement income option, says he believes it could help
participants secure another source of monthly income besides Social Security to
help meet their basic needs. A retirement income option would achieve this
while allowing participants to “set it and forget it,” he adds.

“We feel that it’s important because the vast majority of
our employees prefer the hands-off approach to investments,” Roberts says. “We
definitely understand the value of what a defined benefit plan provided
historically, and we’re trying to capture that value within our 401(k) plan. [A
retirement income solution] helps with retirement readiness. If someone is
approaching retirement and sees that they can ultimately receive X amount of
dollars on a monthly basis, they know they can meet their basic needs when they
retire.”

In an interview with PLANSPONSOR, Chepenik and Roberts describe
the ongoing struggle to make this retirement income option available for plan
participants.

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PLANADVISERDash is a daily e-mail newsletter addressing the specific needs and concerns of advisers who specialize in the sale and servicing of institutional retirement plans by providing industry relevant news, as well as the latest trends from our proprietary research.